Airline business models and Networks

Accelerating airline business model realignment

Nawal Taneja discusses why airlines should realign not just their product, service and productivity levels but also their business models.

MOST AIRLINE MANAGEMENTS FACE A DILEMMA THAT IS NOW ESCALATING – how to adapt to an increasingly changing marketplace and uncertain times. Disruptive changes related to the Internet-driven business, buying behaviour and expectations of passengers, and formidable competitors – some with more resources and fewer constraints, such as those based in the Persian Gulf, and others such as Ryanair, AirAsia and Virgin Australia with more innovative ways to integrate their available resources – pose major challenges to mature airlines. Specifically, established carriers are beginning to see they may no longer be able to charge premium fares in some markets due to the entry by lower-cost carriers in a broad spectrum of stage lengths.

Yet, despite the need for change, traditional and established airlines continue to feel they are blocked by a complex and, in some cases, insurmountable set of constraints that prevent them from invoking major changes to their business models. The constraints cited typically relate, in varying degrees, to fleet, airport facilities, labour contracts, technology systems, bilateral restrictions, government intervention and high debt levels.

On the other hand, many newer generation airlines that have tried to offer services in intercontinental markets, such as Oasis Hong Kong, SilverJet and EOS – while not burdened by such constraints – have faced a different dilemma in that while they saw various levels of demand for new services, they had neither sufficient resources to develop effective networks, nor achieve economies of scale and scope. They had, for example, only a few aircraft that could serve a very limited number of markets relative to the breadth and/or the depth of the networks needed to succeed in the airline business, particularly to compete for premium yield: corporately managed business travellers.

Furthermore, newer generations of domestic and regional airlines also feel they are constrained by artificial government regulations to protect national flag carriers, even though some barriers cited by the established carriers – such as those relating to the workforce and fleet – are, in fact, benefits for the newer generations airlines. Their workforces operate with greater flexibility and the aircraft acquired are more suited to their needs. In the case of Allegiant, for example, even the oldest MD80 aircraft provide an advantage by offsetting the higher operating costs with very low ownership costs.